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Why cost per acquisition advertising doesn't work - For the media provider

(Also known as "Pay per conversion" or Pay per action")

May 18, 2011

Cost Per Acquisition, or CPA, reminds me of my high school politics teachers' comments on communism: "It is the absolute best and fairest system of them all - On paper. It's when you try to actually make it work that all its faults crop up".

The idea behind CPA really is the most fair: An advertiser places an ad on your site and only pays you each time they get a new customer. Sounds fair, right ? In principle, it is: They are only paying for the success of what you are providing them: Promotion of their products and/or services.

However.

There are a lot of problems with this model, of which, we'll cover the big three:

The risk is entirely upon the media provider: In other words, all the work of providing the content that 'attracts the eyeballs' in the first place fall upon the media provider with no compensation until and unless the advertiser makes a sale. Furthermore, while the media provider may well have the best website/radio program, television show/magazine, etc, the advertisers' ad (or destination web site) may, well, it may suck. Or their sales people may be ineffective (Choose your reasons: Too forceful, uninformed, not personable, etc). Or their product or service itself may suck (Buggy whips for your 2011 SUV, anyone ? ). Because of this, you've not only taken up the ad space on your site/other medium, but now you've alienated your viewers because, fair or not, they will assign part of the blame - even unconsciously - for their rotten experience to you.

Your site's content will quickly be drowned out by advertisements. In todays' advertising world, it is a fine balance between consumer content (The stuff they're coming to your site, reading your magazine, watching your show) and advertising space (The stuff that actually pays your bills). If you accepted every Tom, Dick and Jane who asked you for CPA ads, you'd be running something that looked like your local grocery stores' community bulletin board with the content that all those eyeballs - your viewers/users - came to see drowned out. "But wait!", you exclaim, "I'll set limits on how many ads I accept!" - Which brings you full circle back to issue #1 above: All the risk is upon you to gamble on which advertiser will provide the successful ad which will see both sales for them and revenue for you.

You're actually missing out on a lot of revenue. No one likes to say it, but there is always the risk of trust issues with CPA: How do you know that a sale/acquisition/conversion was made ? You don't. You can try to use the assumption that 4% of the viewers will be converted, but that runs the risk of either you or the advertiser getting the short end of the stick. (In my years, I have seen as low as zero percent conversion and as high as 75% conversion). There is also the issue that just because a viewer sees an ad and clicks through to a site/calls the store/visits, they may not make a purchase now, but their decision to make that purchase in six months started directly because of the ad they saw on your medium - And guess who's not going to get paid for it ? You.

So what is the best way to price your ad space ? In a nutshell, there are three primary means of compensation, plus the age old swap of one service for another:

CPM or cost per thousand impressions; You select a price for which your advertiser will pay you X amount of money for every thousand times their ad is displayed1. (Alternatively, though for more highly targeted sites, you can use CPI, or Cost Per Impression, where X represents each impression made, but this is fairly uncommon) - This works well for higher volume sites of 25,000 unique visits or more per month.

CPC or cost per click; You select a price for which your advertiser will pay you X amount of money for each clickthrough from your site to theirs1. This works quite well on nearly any type of site, as you are compensated for every action, the advertiser only pays for active participation of the consumer with their brand and it is entirely up to the advertiser whether or not the actual conversion happens.

Fixed monthly, quarterly or yearly fee: This is perhaps the simplest form of payment (and one that I, personally, use on my sites) where the advertiser pays you a set amount of money per time period, whether they see a million impressions, clickthroughs or conversions, the price is all the same. You are compensated for the space, the advertiser has a guaranteed time frame and budget and the risk is evenly distributed: It is up to you to "keep the eyeballs coming" and it is up to the advertisers to turn passive eyeballs into active customers.

The swap: This is simply an advertiser putting up an ad on your site in exchange for you putting up an ad on theirs, where no money changes hands at all. Sometimes, in business - especially on the Internet - making money isn't always the end goal of the day: Getting traffic, exposure and new readers is of extremely high importance. Having other sites link to yours can be extremely helpful to your search engine rankings, so this method of advertising should definitely not be completely ignored.

So the next question, of course, is how do you set a price for your chosen method of advertising ? That is an article in and of itself, but suffice it to say that not all traffic is equal (A thousand hits on your website may well be worth a heckuva lot more than a thousand on the other guys'), experimentation and communication with your customers are all key.

1Measuring clickthroughs and impressions: It is extremely important for you to use SERVER SIDE metrics to measure these: I.e. Javascripts, Google Analytics, Quantcast and other traffic measuring tools are very handy for getting a general idea on your traffic, but given the sheer number of privacy tools available to the general public, as well as the number of users who have things like JavaScript turned off on their browsers, the difference in what your server reports as actual impressions and clickthroughs (Clickthroughs being measured through an intermediary CGI script that is, again, purely server side and not client side) can be surprisingly large. It is important to point this out to your advertisers, too, as it will save you a lot of explanations, trying to teach them the basics of traffic measurement when they tell you that they saw only 500 impressions from your site where your server is telling you there were 953.